Stagflation Threatens Aviation Industry Outlook

The International Air Transport Association (IATA) downgraded its industry profit expectations for 2008 to $4.5 billion based on global economic growth slowing to 2.6 percent and an average annualized oil price of $86 per barrel (Brent Crude).

This is the second downgrading of the 2008 forecast. In September 2007 IATA predicted a $7.8 billion profit for this year. The initial impact of the credit crunch saw that lowered to $5.0 billion in December 2007.

At an average annual price of $86 per barrel for Brent, fuel represents 32 percent of operating costs and a total bill of $156 billion.

The downturn in demand coincides with a stepping-up of aircraft deliveries - from 1,041 new aircraft in 2007 to an expected 1,231 in 2008. While some of this will be offset by retiring less fuel-efficient aircraft, real yields (adjusted for inflation and the U.S. dollar) are expected to drop 4.1 percent this year (compared to a 3.2 percent drop in 2007).

The U.S.-EU Agreement on Open Skies is increasing trans-Atlantic frequencies by 11 percent in April. London Heathrow and Spain are leading the change with an increase of 25 percent each. Increased competition will put pressure on yields in these markets.

In the past two years non-core business significantly boosted the consolidated profits of airlines. In 2007 alone the contribution of non-core profits and asset sales almost tripled the airline business profit of US$5.6 billion to over $15 billion. The crisis in financial markets will make asset sales more difficult in 2008.